U.S. stocks were sent on a wild ride Monday as the day’s economic data spurred a strong morning-session rally, only to see it fizzle after some reality-based comments from a Federal Reserve official scared the market out of it easy-money stupor. The market later rallied to recoup nearly half of the early-session gains.
The sell-off, which completely erased a 1.5% rally from the get go, seemed to follow a statement from the associate director of the Fed’s bank supervision division that banking system conditions remain “far from robust” and examiners have noticed “sharp deterioration” in loan portfolios. He explicitly stated problems the Fed is seeing in commercial real estate loans but also seemed to show concern regarding corporate loan portfolios as well. We’ll touch on some statements on bank regulation and commercial real estate below.
In the end consumer staples, basic material, and industrial shares led the gains. Utilities and telecoms were the losers as the only two of the 10 major industry groups that failed to end on the plus side. Financials were whipsawed, down as much as 4.2% from their day’s peak but ended up closing just 1.6% below the session’s apex – the group closed the session higher by roughly 0.8%.
Ten stocks rose for very seven that declined on the NYSE. Some 1.5 billion shares traded on the NYSE Composite, 16% higher than the six-month average.
Market Activity for November 2, 2009
Banking Industry Issues – and That Means Economic Issues
The WSJ reported on Saturday that regulators have issued guidelines that allow banks to term commercial real estate loans as “performing” even when the underlying property values have fallen below the loan amount. This is not a reversal of existing rules, but does provide more clarity as banks struggle to deal with the erosion in commercial RE assets.
This increased clarity is not that all that much different from the change to mark-to-market (specifically FASB 157) accounting that offered greater lucidity (at the time with regard to troubled residential loans) and stopped the regulation from artificially destroying capital positions within the banking system. If banks are going to hold assets (a loan) to maturity, so long as the interest and principal payments are current, why write them down to distressed prices and destroy capital? It would only cause additional economic harm – and indeed it did.
But also recall, before that I was conspicuously in favor of the original TARP. That program would have used an RTC-style structure to remove bad assets from banks’ books and placed them in an account that the government would run -- hold assets for 5-10 years, however long it takes, until the RE market normalizes and sell them off. Regulators can provide increased levels of clarity, and that is helpful, but it doesn’t change the fact that banks still carry a lot of troubled loans on their books.
This was Bill Seidman’s Resolution Trust Corp. back in the very early 1990s that proved so successful, it made a profit for the government, and that is the point – doing what history has shown to work. Unfortunately, TARP was changed to this idiot idea of injecting government money into the banking system – we expressed a steadfast objection to this move back in the winter of 2008. It was changed because the original TARP plan was seen as too plodding, but it may very well have been up and running by now – if so, we may just be on the road to a somewhat more normal environment.
The overall reality though is that commercial RE defaults are a ticking bomb for a large portion of the banking system that the market seems to be ignoring – a lot of risks have been ignored of late but this is what an easy-money/ZIRP does, it distorts markets. The larger issue now is that without an RTC-style program banks will be saddled with bad assets for some time to come and that means little to no credit expansion. In the world of intense government intervention we currently find ourselves, an RTC-style solution would have been much less damaging than many of the things we have tried (and continue to try).
We are in a nasty situation here and the investor needs to come to grips with the reality on the ground, you just can’t casually move out along the risk curve as if this were a normal business-cycle expansion, or a typical political environment.
ISM Manufacturing
The Institute for Supply Management’s manufacturing index rose to 55.7 in October (highest since April 2006), up nicely from 52.6 printed in September – the reading blew by the expectation of 53.0.
This move in ISM marks the third month of expansion and the October reading is fairly robust (for this environment); it mirrors the 55 print out of China the night before.
Most of the sub-indices looked good as new orders, backlog of orders, supplier deliveries and export orders remained in expansion mode. However, all of these but export orders showed a slower pace of expansion relative to the September readings.
The best news of the report was the rise in the employment figure – up to 53.1 from 46.2, the first month of expansion since July 2008 (probably some callbacks thanks to increased auto assemblies). This area was a big concern on Friday when the Chicago manufacturing’s employment figure remained pretty deep in contraction territory. Eight of the 18 industries tracked by ISM reported employment growth, up from three in September.
The inventory figures have been another area of concern as the data has yet to show an actual rebuilding of stockpiles is taking place. ISM’s inventory figure bounced in October, but it does remain in contraction mode, up to 46.9 from 42.5 – the trend is really nice though. The customer inventories reading (what respondents to the ISM survey think of their customers’ inventories levels) fell 0.5 to 38.5. This means they think their customers’ stockpile levels are too low, so after seven months now of this reading being below 50 maybe this is a sign some inventory rebuilding may ensue over the next couple of months. Conversely, it also shows that businesses have little confidence regarding future sales.
Overall, it was a good report and certainly the best we’ve seen (from an all-around perspective) since the summer of 2007. Thirteen of the 18 industries tracked reported growth, unchanged from September.
Pending Home Sales
The National Association of Realtors reported that September pending home sales jumped 6.1% from the previous month – the reading was expected to come in unchanged. This large increase in contract signings was undoubtedly due to the rush to get in before the first-time homebuyers’ tax credit expires (have to close before November 30, and it’s taking 6-8 weeks to close). The October data will likely mark an end to this strong six-month run that was driven by a powerful trifecta – the tax credit, the home buying season and Fed-induced rock bottom interest rates. Of course, September home buyers didn’t know the credit was going to be extended, which is highly likely now.
In terms of region, the West led the way as pending home sales jumped 10.2% -- a sign foreclosure-driven price declines also fueled the September increase. The Midwest posted the second-best increase, up 8.1%, with the South printing a 4.9% rise. Contract signings fell 2.0% in the Northeast.
In terms of the tax credit’s extension, the number we keep hearing is April 30 (or contract closed 60 days after that date). At some point though the credits must come to an end and that is when we’ll learn the true status of the housing market. As mentioned above, this is just another government scheme that distorts the true market fundamentals.
Construction Spending
Construction spending rose 0.8% in September, fueled by a 3.9% jump in residential construction. I can see this becoming quite the problem when home sales wane as the supply figure will jump again.
The commercial side declined for a fifth-straight month, down 13.7% at an annual rate over the past three months. The public side has helped to offset the plunge in private-sector commercial construction (private sector down 26.8% annualized over the past three months and getting worse, public sector commercial construction up 5.3% on the same basis).
Futures
Stock-index futures are down big this morning as the safety trade makes a bit of a comeback. However, pre-market trading has pared some of those losses on news that Berkshire Hathaway, the investment vehicle for Warren Buffett, will purchase the 77% of Burlington Northern (railroad) that is doesn’t already own in a cash and stock deal. The deal is $100/share, or a 30% premium to yesterday’s closing price.
Have a great day!
Brent Vondera, Senior Analyst
The sell-off, which completely erased a 1.5% rally from the get go, seemed to follow a statement from the associate director of the Fed’s bank supervision division that banking system conditions remain “far from robust” and examiners have noticed “sharp deterioration” in loan portfolios. He explicitly stated problems the Fed is seeing in commercial real estate loans but also seemed to show concern regarding corporate loan portfolios as well. We’ll touch on some statements on bank regulation and commercial real estate below.
In the end consumer staples, basic material, and industrial shares led the gains. Utilities and telecoms were the losers as the only two of the 10 major industry groups that failed to end on the plus side. Financials were whipsawed, down as much as 4.2% from their day’s peak but ended up closing just 1.6% below the session’s apex – the group closed the session higher by roughly 0.8%.Ten stocks rose for very seven that declined on the NYSE. Some 1.5 billion shares traded on the NYSE Composite, 16% higher than the six-month average.
Market Activity for November 2, 2009
Banking Industry Issues – and That Means Economic IssuesThe WSJ reported on Saturday that regulators have issued guidelines that allow banks to term commercial real estate loans as “performing” even when the underlying property values have fallen below the loan amount. This is not a reversal of existing rules, but does provide more clarity as banks struggle to deal with the erosion in commercial RE assets.
This increased clarity is not that all that much different from the change to mark-to-market (specifically FASB 157) accounting that offered greater lucidity (at the time with regard to troubled residential loans) and stopped the regulation from artificially destroying capital positions within the banking system. If banks are going to hold assets (a loan) to maturity, so long as the interest and principal payments are current, why write them down to distressed prices and destroy capital? It would only cause additional economic harm – and indeed it did.
But also recall, before that I was conspicuously in favor of the original TARP. That program would have used an RTC-style structure to remove bad assets from banks’ books and placed them in an account that the government would run -- hold assets for 5-10 years, however long it takes, until the RE market normalizes and sell them off. Regulators can provide increased levels of clarity, and that is helpful, but it doesn’t change the fact that banks still carry a lot of troubled loans on their books.
This was Bill Seidman’s Resolution Trust Corp. back in the very early 1990s that proved so successful, it made a profit for the government, and that is the point – doing what history has shown to work. Unfortunately, TARP was changed to this idiot idea of injecting government money into the banking system – we expressed a steadfast objection to this move back in the winter of 2008. It was changed because the original TARP plan was seen as too plodding, but it may very well have been up and running by now – if so, we may just be on the road to a somewhat more normal environment.
The overall reality though is that commercial RE defaults are a ticking bomb for a large portion of the banking system that the market seems to be ignoring – a lot of risks have been ignored of late but this is what an easy-money/ZIRP does, it distorts markets. The larger issue now is that without an RTC-style program banks will be saddled with bad assets for some time to come and that means little to no credit expansion. In the world of intense government intervention we currently find ourselves, an RTC-style solution would have been much less damaging than many of the things we have tried (and continue to try).
We are in a nasty situation here and the investor needs to come to grips with the reality on the ground, you just can’t casually move out along the risk curve as if this were a normal business-cycle expansion, or a typical political environment.
ISM Manufacturing
The Institute for Supply Management’s manufacturing index rose to 55.7 in October (highest since April 2006), up nicely from 52.6 printed in September – the reading blew by the expectation of 53.0.
This move in ISM marks the third month of expansion and the October reading is fairly robust (for this environment); it mirrors the 55 print out of China the night before.Most of the sub-indices looked good as new orders, backlog of orders, supplier deliveries and export orders remained in expansion mode. However, all of these but export orders showed a slower pace of expansion relative to the September readings.
The best news of the report was the rise in the employment figure – up to 53.1 from 46.2, the first month of expansion since July 2008 (probably some callbacks thanks to increased auto assemblies). This area was a big concern on Friday when the Chicago manufacturing’s employment figure remained pretty deep in contraction territory. Eight of the 18 industries tracked by ISM reported employment growth, up from three in September.The inventory figures have been another area of concern as the data has yet to show an actual rebuilding of stockpiles is taking place. ISM’s inventory figure bounced in October, but it does remain in contraction mode, up to 46.9 from 42.5 – the trend is really nice though. The customer inventories reading (what respondents to the ISM survey think of their customers’ inventories levels) fell 0.5 to 38.5. This means they think their customers’ stockpile levels are too low, so after seven months now of this reading being below 50 maybe this is a sign some inventory rebuilding may ensue over the next couple of months. Conversely, it also shows that businesses have little confidence regarding future sales.Overall, it was a good report and certainly the best we’ve seen (from an all-around perspective) since the summer of 2007. Thirteen of the 18 industries tracked reported growth, unchanged from September.Pending Home Sales
The National Association of Realtors reported that September pending home sales jumped 6.1% from the previous month – the reading was expected to come in unchanged. This large increase in contract signings was undoubtedly due to the rush to get in before the first-time homebuyers’ tax credit expires (have to close before November 30, and it’s taking 6-8 weeks to close). The October data will likely mark an end to this strong six-month run that was driven by a powerful trifecta – the tax credit, the home buying season and Fed-induced rock bottom interest rates. Of course, September home buyers didn’t know the credit was going to be extended, which is highly likely now.
In terms of region, the West led the way as pending home sales jumped 10.2% -- a sign foreclosure-driven price declines also fueled the September increase. The Midwest posted the second-best increase, up 8.1%, with the South printing a 4.9% rise. Contract signings fell 2.0% in the Northeast.
In terms of the tax credit’s extension, the number we keep hearing is April 30 (or contract closed 60 days after that date). At some point though the credits must come to an end and that is when we’ll learn the true status of the housing market. As mentioned above, this is just another government scheme that distorts the true market fundamentals.
Construction Spending
Construction spending rose 0.8% in September, fueled by a 3.9% jump in residential construction. I can see this becoming quite the problem when home sales wane as the supply figure will jump again.
The commercial side declined for a fifth-straight month, down 13.7% at an annual rate over the past three months. The public side has helped to offset the plunge in private-sector commercial construction (private sector down 26.8% annualized over the past three months and getting worse, public sector commercial construction up 5.3% on the same basis).
Futures
Stock-index futures are down big this morning as the safety trade makes a bit of a comeback. However, pre-market trading has pared some of those losses on news that Berkshire Hathaway, the investment vehicle for Warren Buffett, will purchase the 77% of Burlington Northern (railroad) that is doesn’t already own in a cash and stock deal. The deal is $100/share, or a 30% premium to yesterday’s closing price.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment